Developments in contract: When “Subject to contract” ends
A brief summary of the principles, recent developments and practical tips in relation to the use of "Subject to contract" wording during negotiations.
- When considering whether a contract has been entered into, as opposed to when interpreting a contract agreed to exist, the court may consider the actions of the parties after the deal was allegedly struck.
- The principle applies regardless of whether the negotiations are conducted in writing, orally, by conduct or by a combination of these means of communication.
- If an offer is caveated by “Subject to Contract” wording, the parties need to make an unequivocal statement that they have agreed to waive that status and that the contract is now intended to become binding.
- In Global Asset Capital, Inc and another v Aabar Block S.A.R.L and others the Court of Appeal overturned the High Court’s conclusion that the parties had reached an agreement during a telephone call considering a "Subject to Contract" offer letter. The Court of Appeal unanimously held that the parties' subsequent dealings were inconsistent with the conclusion that an agreement had been reached.
- When deciding whether a contract has been made, the Court of Appeal confirmed that the court will consider the whole of that which took place and passed between the parties to avoid receiving a misleading impression of whether the parties had reached agreement.
- Whilst the principle that one cannot "interpret the meaning of words used in a contract by reference to what happened later” applies to construing contracts, it does not apply to the issue of whether a contract was entered into in the first place.
- The Court of Appeal accordingly held that the High Court was wrong to conclude that it should not take account of the parties' communications after the telephone call when considering whether the parties had made a contract on that date.
- The Court of Appeal also overturned the High Court’s conclusion that the Claimants had a realistic prospect of establishing that the parties waived the “Subject to Contract” status of their dealings. In order to waive such status, the parties need to make an unequivocal statement that they intend to be bound by the document, and the Claimants had failed to show that this occurred.
- The Court of Appeal considered the parties’ actions both during and after the telephone call to decide that the parties dealings were inconsistent with there being a binding contract in place. For example, the Defendant imposed a condition on the call that the Claimants resend an offer in open and binding terms, but the Claimants subsequently introduced new terms to the offer.
What this means
- To avoid being inadvertently bound to an earlier draft, contracting parties should ensure that all drafts and correspondence are marked “Subject to Contract”.
- However, contracting parties should nonetheless be wary that their actions might be interpreted as waiving “Subject to Contract” status. Accordingly, parties should ensure that nothing in their dealings suggests that an agreement has already being reached. This can be done, for example, by maintaining that the agreement be "subject to" final form documentation and avoiding distinguishing between “key commercial terms” (which are often agreed earlier) and the agreement as a whole.
- Finally, contracting parties should be aware that the court will consider all their actions, be it oral, written, conduct or in combination, when deciding whether an agreement has been made, or “Subject to Contract” status waived. There is less likely to be uncertainty as to the status of contractual negotiations if they are conducted in writing, but if oral conversations are necessary, it is worthwhile to clearly state at the end of a call that matters remain subject to being concluded in writing.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.